7 terrible financial advice tips you should ignore
Learn how to stop listening to terrible financial advice
Have you fallen victim to bad financial advice? Perhaps more than once? Was it from a colleague, a family member, a friend, or even a financial adviser?
Social proof is powerful. People will often credit others with the ability to give financial advice, merely based on their acquaintance with another who does have financial knowledge.
It is like accepting the diagnosis of a friend for an illness you might or might not have, just because they are acquainted with a doctor.
Often, we focus so much on finding good financial advice that we do not notice what terrible advice looks like. If you have been given any of the following pieces of financial advice, especially without the person knowing your situation, you MUST reconsider them.
1. Buying a house is ALWAYS the best investment.
Of course property can be a good investment, but it is not ALWAYS the best one. Following the 2008 Global Financial Crisis average house prices in the UK experienced a decline of 18.9% in just 12 months, after a decade of steady increases, according to Halifax. So if you had a property worth £200,000 pre-crisis, then this would have been worth £162,200 post-crisis. You should also take note of other costs that come with acquiring property, costs that most real estate agents never tell you about until you’ve signed the papers and made the purchase, such as insurance, taxes, and maintenance costs, among others.
The real estate market is known for its volatility. So if someone tells you, with absolute certainty, that your property’s value will never decline, think again. As one of our qualified financial advisers says, “There is no such thing as a ‘best investment’. It’s all about getting professional advice on what’s most appropriate given one’s individual circumstances.”
And above all, remember that property is leveraged, so if you are borrowing 70% of the value of the property and it rises in value, your profits are exaggerated by your borrowing. Likewise, if the property falls in value, your losses are exaggerated.
2. Get a 25-year or 30-year regular savings plan.
Many fall into the trap of the decades-long regular savings plan. But why is this not a good idea?
Most long-term savings plans are expensive, commission-driven and lack transparency on charges. You might be surprised that you are not getting the returns your adviser promised for the first few years. So why the slow growth, if any at all? This is because your progress is being swallowed by hidden exorbitant charges, and of course, commissions that the adviser got paid when you took the regular savings plan out. To prove this point, ask your adviser if he would get a 25-year regular savings plan or if he would recommend it to his mother, and his answer would probably be ‘No’.
3. You should always stop investing when the market is down.
This is pretty common advice, which most inexperienced investors are given. But is it really a sound investment strategy?
According to Fidelity Investment’s analysis of stock market history, it is better to stay invested regardless of stock market prices. Those who remained fully-invested in the last 15 years have generated annual returns of 4.74%, whilst those who missed only 10 days had returns of 0.55%. Threats of a market crash can definitely make you rethink continuously investing, but in the long run, your investments can pay off.
4. You ALWAYS need a financial adviser to manage your investments for you.
If you already know where and how you want to invest, you always have the option to Do-It-Yourself (DIY). The best thing about DIY is that it is free and saves you the cost of advice. And when there is no cost for advice, you can maximise the returns on your investment. Of course, this will work if you know exactly what you are doing. If you have acquired a much larger investment portfolio and want to diversify your investments, financial advice is always available in case you require it in future.
5. Offshore bonds are great for everyone, regardless of where they live.
Offshore bonds are recommended due to their tax efficiency, but if you live in a country with low or no income tax, such as Qatar or the UAE, investing in offshore bonds makes little or no difference to your tax position. More importantly, those selling offshore investment bonds will also often laden them with high-risk investments (such as structured products), which are usually difficult to understand (for the regular investor), not always feasible, and loaded with hidden charges.
6. Everybody needs life insurance.
Not quite. Life insurance is a great option for individuals who have dependants, such as children or elderly parents. However, if you are a single individual with no dependants, you might be paying for something no one you are close to will benefit from.
7. Leaving your money in cash is risk free and the best way to save.
Granted, cash is less risky. But, with interest rates at historically low levels, the chances of it increasing above the rate of inflation is very low. This means that after five years, the money you have put in could hold less value in real terms than when it was first invested.
There is also the risk that your bank could go bust. While this seems less likely risky if you are using a big brand bank in the current environment, the carnage reaped on the US banking industry in 2008 shows it can happen.
These terrible pieces of financial advice may not just come from people you know, such as your family, friends or colleagues. Most unregulated offshore salesmen, all charming and charismatic, give the same terrible financial advice, while they are clamouring to get their hands on your hard-earned money. And this is one of the reasons why AES International has created a buzz in international financial services – because we dare to be different and tell people the truth. If you believe you have been given terrible financial advice, click the below and we will try to set things right.
About Carlton Crabbe
Carlton Crabbe was previously an Ultra High Net Worth and High Net Worth wealth manager at AES International. His blog posts remain relevant for expatriate investors.